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Manufacturing digital ICs is expensive, as it requires state-of-the-art technology and processes. On the other hand, digital products are cheaper, so cost recovery is more difficult. This has led to specialization in the industry and a greater contribution from Asian manufacturers. However, a significant portion of the intellectual property remains with the domestic companies.

One of the primary beneficiaries of the growth in mobile phones, tablets and the like is ARM Holdings (ARMH - Snapshot Report), with its power-efficient, low-performance chip architecture that dominates the growing mobile phone and tablet markets. With new versions of ARM chips coming to market, it is likely that the chips will gradually spread to the server segment as well (probably not a 2012 phenomenon).

Others would be Qualcomm (QCOM - Analyst Report), Samsung and Texas Instruments, all of which are big semiconductor manufacturers that use ARM architecture. As such, we remain relatively positive about Samsung and Qualcomm in 2012.

We are also optimistic about Intel and AMD, given their new product ramps and focus on the data center segment. Although we are a wee bit cautious about Intel’s growth initiatives in mobile and believe that execution will be key to delivering on its plans, the company’s market position, cash balance, technology lead and management strategy and execution are positives in our opinion.

AMD is also worth watching, as management has been delivering on its promises. Moreover, the company is seeing some real success in its graphics business, which should complement initiatives targeted at rationalizing its debt, increasing focus on R&D and operation of a lower-cost model.

The analog and mixed-signal market is dependent on innovation. Consequently, these products generate higher margins than digital products. They are also more customized and have longer life cycles.

Most of these companies are seeing somewhat stronger demand right now, although there are some issues based lingering effects of the Thailand floods and economic sluggishness. We are particularly positive about Semtech Corp (SMTC - Snapshot Report), given its recent deal wins, product cycles, order rebound and position in the communications market.

Companies like Linear Technology (LLTC - Analyst Report) has a focus on the automotive end market that should do well this year.

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